When Banks Fail: Board Fiduciary Responsibilities
By Karen Greve Milton, Senior Consultant

Late on the evening of Wednesday, March 8, 2023, a local bank in California, Silicon Valley Bank  (“SVB”), decided to sell its entire $21 billion portfolio of long-term fixed income assets, netting the bank a $2 billion loss.  At the time of the sale, SVB’s total assets exceeded $200 billion. A $2 billion loss against bank assets far exceeding that amount should not cause any concern among the bank’s depositors, right? Wrong.

The actions taken by SVB that fateful Wednesday evening turned out to have a seismic impact on SVB as well as the nation’s banking system. The SVB portfolio sale triggered a mass panic among the bank’s depositors which led to a run on the bank and ultimately, the federal government taking over the bank on March 10. Ultimately, the federal government backstopped SVB depositors with liquid assets over the FDIC-

The implosion of SVB and the recent banking crisis provide a cautionary tale for non-profit boards of directors. In his book, Ten Basic Responsibilities of Nonprofit Boards, Richard T. Ingram writes that boards of directors have a duty to “protect assets and provide financial oversight” for the non-profit organizations entrusted to their care. See Ten Basic Responsibilities of Nonprofit Boards, ch. 7, pp. 51-64.  Generally, boards carry out their fiduciary duties through a finance committee of selected board members. The finance committee ensures that the non-profit’s financial resources are managed appropriately without being subject to undue risk.  See Ingram at pp. 58-59.

The caveat about not subjecting the non-profit’s financial assets to undue risk ties into the issues raised by the March 2023 banking crisis. Under the FDIC, bank deposits — for both individuals and businesses alike—are only ensured up to $250,000. Unlike the federal government’s actions regarding SVB and Signature Bank, deposits in excess of this limit may or may not be recovered in the event of a run on the bank and an ultimate bank failure.

There may be strong business reasons for non-profit organizations to maintain liquidity of financial resources in excess of the FDIC threshold. But board finance committees need to think about the best ways to protect these financial assets within the current FDIC-insured limits. 

I am a member of a non-profit board of directors where I also serve as the organization’s Treasurer. This non-profit has its banking operations headquartered with one of the four largest banks in the country. Last year, due to complaints about the lack of customer service from the organization’s current bank, the finance committee approved a recommendation from the executive director and chief financial officer to move the organization’s banking business to the regional bank where the non-profit’s investments were being managed. The transfer of the bank accounts, for reasons beyond the scope of this article, dragged on for months and still had not occurred at the time of the SVB implosion. 

So, what actions did we take and what actions should a board finance committee take? The good news is that our investment management team reached out to us almost immediately to assure us that our organization’s investment portfolio was safe. We remained in almost daily contact with them throughout the banking crisis.

Secondly, we decided to “pause” the transfer of the organization’s bank accounts to this regional bank until we had the opportunity to re-assess the situation. Ultimately, the executive director and I asked the chief financial officer to research several other community banks near the organization’s offices and provide a recommendation to the finance committee. 

We also checked in with sister organizations to learn how they handled their banking business, including the need to maintain liquid cash in amounts exceeding $250,000. What we learned from our sister organizations reinforced for us the need to maintain bank accounts at multiple banks to satisfy our need to maintain cash amounts in excess of $250,000 and to ensure that all the non-profit’s cash resources were within FDIC protection limits.

Lessons learned from the banking events of March 2023:

1. Develop and implement a financial plan to manage all the financial assets of the non-profit organization
2. Engage in strong financial oversight and management of the non-profit’s financial resources. 
3. Develop, implement, and follow financial policies pertaining to fiscal management and investment of the non-profit’s financial resources
4. Maintain liquid cash assets in anyone banking institution within the FDIC-insured limits
5. Consider spreading cash assets in excess of $250,000 among multiple banking institutions
6. Investigate whether large amounts of cash resources can be invested in investment vehicles that provide both higher rates of return with the ability to liquidate these investments quickly and without penalty
7. Bank where the non-profit can develop a strong banking relationship with good customer service.  Notwithstanding the SVB implosion, community and regional banks provide firm financial support to non-profit organizations located within their communities
8. Be proactive about managing the non-profit’s financial resources. Ask questions. Gather information. Take the actions necessary to carry out your fiduciary duty